T+2 is finally close but shouldn't we do more?

18 Jan 2017

American markets are due to mirror Europe’s settlement period and move to T + 2 towards the end of 2017, the time taken between when a transaction is initiated and when that trade is executed and completed fully.

This is an important development as it brings greater harmonisation to key Financial markets. For several years now, companies in the EU have settled at T+2 days while US Financial Services firms have operated at a T+3 standard. 2017 is set to be the year that finally changes.

Andrew Smith- CEO of corfinancial says that the move is welcome and long overdue.

“There is a need for a common operating standard, which the industry – for now – agrees is T+2. But it has taken many, many years for us to get to this point. While the EU standard was legislated a few years ago, the US will be live by the end of 2017 following an industry wide initiative to move to this standard. The US has been operating at T+3 since the 1990s.

“What has made this shift slow is not a lack of motivation, but rather the sheer scale of the change required. This is not just a technology problem that market participants have to solve – although there are very significant technology efforts and investments needed to make the change happen.

“Rather, what complicates matters so much is that there are a whole host of data, work flows and business processes that have to be realigned all across the sector’s value chain to achieve this common standard. We should be under no illusion about the scale of the challenges that have to be overcome. The shift to T+2 really is one of those once in a generation transformation programmes and should not be undertaken lightly.”

There are very clear advantages to moving to a T+2 system such as reduced counterparty risk, lower margin cover and less stringent liquidity demands. The commissioner of the US Securities and Exchange Commission, Luis A Aguilar, expects this shift to “pay considerable dividends”.

Yet, Smith wonders whether there is not an opportunity lost here. “Let us not lose sight that when Lehman Brothers got into trouble in 2008 the real concern focused on the threats caused by counterparty risk. There was a real fear that Lehman defaulting would expose a whole number of counterparties who would be dragged down by significant losses, thereby threatening the solvency of the entire system.

In very recent times there have similar concerns expressed about other large banks and financial institutions that expose the entire financial system because they have large and very complicated counterparty exposures, particularly in derivatives. Quick and effective settlement is vital to reducing these systemic risks. Does T+2 provide a sufficiently robust defense to any systemic risks to the sector?”

He notes that “even at T+2 there are too many firms in the settlement sector who will still rely on manual processes. Manual execution perpetuates all sorts of inefficiencies and scope for human error, not just for asset managers but also brokers and administrators, who have to translate the data into a format suitable for their systems.

Together, these manual dependencies just add further vulnerabilities, delay and cost. Why is there still not a push by regulators to insist on greater automation to strengthen the resilience of market infrastructure as the US and the EU harmonise?”

He continues further along the theme of opportunity lost asking why “market regulators in both the US and the EU have not moved together in their efforts to improve settlement beyond T+2, perhaps to T+1 or even prepare the way for T+0?”

Smith argues that “one meaningful way to reduce counterparty risk is to lower the time taken to settle. Legislated mandates that demand shorter settlement times are more likely to be successful than if it is left as an industry initiative on its own.

There are a number of disruptive technologies such as blockchain that could bring about a completely fundamental redesign of how settlement could take place. The sector should be working closely with Industry regulators in both the US and the EU to see how successful user cases could be defined.”